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- Identify and Navigate Tax-Related Issues for Small Businesses
Benjamin Franklin once said: “Only two things in this world are certain: death and taxes.” Paying taxes can feel like a bit of a downer, but the silver lining is that having to pay taxes generally means your business makes money! As a business owner, you have tax requirements that you need to meet when you apply for a business loan. Here, you’ll learn more about identifying potential tax-related issues and how you can take better ownership of your business’s finances.
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Tax requirements according to your business structure
Your small business is required to pay taxes and manage its finances on a yearly schedule. This schedule is called a tax year. There are two types of tax years:
- Calendar tax year: 12 months, starting on January 1st and ending on December 31st
- Fiscal tax year: 12 months, ending on the last day of any month except for December
The fiscal tax year might seem a bit odd—why not just follow the regular yearly calendar? Some businesses benefit from a fiscal year because their sales experience periods of higher and lower revenues, perhaps due to seasonality. If this sounds like you, then a fiscal tax year may help you to reduce your tax burden if the tax year aligns better with your sales cycle. In this case, a fiscal year may also better reflect your business’s progress.
The first time you file your business taxes is when your designated tax year will officially go into effect. If you want to change this, you may typically do so by filing a request with the IRS. Learn more about tax years and IRS requirements.
Tax types and rates
The tax types and rates will generally vary depending on the legal structure of your small business.
- If your business is a corporation, you’ll have a corporate income tax
- If you own an LLC, it’ll be taxed separately from you, the owner
- If you have a sole proprietorship, your personal and business taxes will be on the same form and return
If you sell goods, you should also consider sales and use tax. Most retailers pass this cost along to the customer, but the business is still responsible for paying that money to the government. If you have employees, you should plan on paying employment taxes as well as withholding social security, medicare, and other income taxes from their salaries. And lastly, don’t forget about any property tax you may owe on any equipment and commercial real estate. Check your local government’s policies for more information on this.
To recap, your taxes will likely vary based on:
- Your legal structure (a corporation versus an LLC versus a sole proprietorship)
- Whether or not you sell goods
- Whether or not you employ anyone
- Whether or not you are in possession of property or equipment for your business
6 Common concerns surrounding small business taxes
Understandably, managing your taxes as a small business owner may be overwhelming and even scary. Here are some of the more common areas where entrepreneurs might run into tax-related headaches.
1. Underpaying taxes
When in doubt, overpay. It’s better for the IRS to have to give you a tax refund than ask for more money. Remember that most small businesses are required to pay estimated quarterly taxes. Each quarter, you have to estimate your state and federal income tax payments and submit them to the IRS and state treasury. Don’t forget to factor in any additional tax, like sales tax, even though you pass it on to your customers.
Treat these quarterly payments as your friend! They may help you stay on track and space out your payments, as opposed to making one huge payment later on. It’s typically a good practice to keep up with these so that you can avoid tax penalties and cash flow problems down the line.
2. Poor record-keeping
A lot of business owners groan at the thought of bookkeeping. But if you keep up with your finances over time, it’s typically going to make tax season so much easier. Good documentation of your business finances helps you stay on top of your tax liability. Keep a consistent record of your income(s) and expenses so that you can better estimate your quarterly payments.
Along with the type of structure you have for your business, the types of people you have working for you will also impact your taxes. For example, employees are taxed differently than contractors. Classifying your business and its staff correctly means that you’ll typically have a better idea of what’s expected for your taxes.
4. Forgetting about deductions
Deductions may help reduce your tax burden, but a lot of small business owners overlook these completely. Do you use your smartphone for work? You might be able to deduct a percentage of the bill as a business expense. The same may be true if you have a home office. You might be able to deduct a percentage of your monthly rent/mortgage payment, along with any associated expenses—like your internet and utilities. How about gas/mileage?
Take note of any money you’ve spent. The IRS is generally strict about what’s professional and what’s personal. However, it may be a good idea to write down what you spent in the moment so that you don’t forget it later on. Then, your tax professional may better determine if it’s really a deduction or not.
True, this has its limits. You can’t deduct everything you eat because you’ve rationalized that you need to eat in order to run your business, so therefore, it’s a business expense. However, accurately deducting legitimate expenses may help to save you some money when Uncle Sam comes knocking on your door.
5. Not separating the personal from the professional
While it may be tempting to use one credit card for everything, separating your personal and business expenses may help you avoid major headaches. This even goes for business owners who are sole proprietors. Yes, you typically still need to keep your finances separate! This means that your business has its own bank account and credit card. It might require a few extra steps, but it’ll typically make your life easier—especially if you happen to get audited.
6. Underreporting your revenue
As a business owner, you’re required to report all of the money you earned for the year. The IRS is going to match it up with their own records, so don’t plan on trying to pull a fast one on them. This may be considered to be tax fraud, and it may land you in hot water.
Of course, honest mistakes may happen. Should you unintentionally misreport your financials, you’ll likely have the opportunity to correct them and pay the right amount.
How to better manage tax-related issues
Are the consequences of letting your taxes slip through the cracks serious? Generally, yes. Here’s the good news: You may effectively avoid them! When you understand what’s expected of your business, you may better address any potential concerns before they arise. Here are a few ways you may be able to do that:
1. Hire help
If you feel that managing your finances is difficult, you’re not alone. That’s why there are accountants and bookkeepers. Consider hiring someone to help you manage and understand all of your financial obligations. “I can do it myself and save money,” you’re thinking. But that’s usually not the case. Staying on top of your finances and self-filing your taxes will typically take many hours of your time—time that you could spend growing your business. And the risk of error is often high. Consider hiring someone who does this for a living. It’s generally worth the investment.
2. Take your paperwork seriously
Make bookkeeping a breeze by saving all of your receipts, files, and workbooks. You’ll likely need some of this documentation when the time comes to file your taxes.
Additionally, consider keeping up to date with your transactions throughout the year, instead of letting them pile up to deal with later. This typically helps you to avoid any surprises once tax season rolls around and makes it easier to accurately calculate your quarterly payments.
3. Be thorough and timely
Submit your personal and business taxes on time and triple-check that you’ve included all of the necessary personal information and documentation. Start early so that you are better prepared to get everything in well before the deadline.
Should you still come up against the clock and realize you need a little breathing room, you may likely be able to file for a tax extension. You need to get this approved by the IRS before Tax Day. However, an extension to file your taxes is not an extension to pay them!
Following these tips may help your business stay on top of its tax requirements and may also make it easier to apply for financing, like an SBA loan. Keeping your records tidy and being ahead of schedule will typically make the application process quicker and smoother.
Handle your financials like a pro
Whether you follow a calendar tax year or fiscal tax year, your business must pay the taxes that reflect your legal structure, the goods you sell, and the people you employ. Identifying potential tax-related issues before they arise may help keep you in the good graces of the IRS. The most common roadblocks that small businesses run into is underpaying on their taxes, poor record-keeping and misclassification—all of which you may easily avoid. Consider hiring a professional to help you, keep your paperwork in order, and aim to pay your quarterly taxes slightly in advance so that you’re ahead of the game - and on the same page - with the IRS.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.